The Russell Reconstitution: Plan For 2008 by Don Bright
Are there still profit-making opportunities in the Russell
2000? Find out here.
There has been a lot of discussion about the “Russell
reconstitution” and whether there would still be a good
profit opportunity for professional traders. Some have
opined the “edge is gone,” but I am here to say, “No, it isn’t.” I have hundreds of traders, many of whom made excellent
money using various strategies, all focusing on this event.
First off, here’s a basic description of what we’re talking
about. Each stock market index is composed of individual stocks. The Dow Jones Industrial Average (DJIA) has only 30
stocks, and the Standard & Poor’s 500 holds 500, obviously.
The Russell 2000 is made up of 2,000 small- to mediumcapitalization
companies (1,001st through the 3,000th largest
domestic stocks as judged by market capitalization). The
reconstitution is simply the replacement of certain stocks
with others. You have “adds” and “takeouts.” The most
recent replacement day was June 22, 2007.
The reasoning behind the concern about making profits
was based on the fact that the stocks being swapped are
known well in advance of the actual event. This is not the case
with the S&P 500 (they use a closed approach). This knowledge
leads to what is referred to as “front-running” — buying
the adds and shorting the takeouts ahead of the event. Bright Trading had traders who did, in fact, begin their trading
weeks ahead of the June 22nd date. Our people tended to
close most positions ahead of June 22 profitably and then take
a clean slate for the actual event. Simply knowing the new
composition of stocks ahead of time is not enough to guarantee
profits (“guarantee” is a tough word to use in this business
anyway), but when combined with some market savvy,
access to enough capital (via professional capital-use capabilities),
our traders did very well.